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Biotech stocks surge as Medicare report relieves worries

Biotech rally underway

The iShares Nasdaq Biotechnology ETF (IBB) popped more than 2 percent on Wednesday, after a U.S. report on Medicare spending showed the government insurer's growth rate hasn't exceeded a target that could trigger cost cuts.

The ETF ended the day modestly higher.

The reprieve relates to a provision in the Affordable Care Act focused on Medicare spending. If spending growth by the government insurer surpasses a certain threshold, a group called the Independent Payment Advisory Board (IPAB) is tasked with recommending cost reductions. Investors feared this could be triggered for 2016, leading to lower spending on drugs.

"Medicare spending didn't trigger initiation of the Independent Payment Advisory Board to slash costs, a relief for the beleaguered drug industry whose shares have slumped since the start of the year" Art Hogan, of Wunderlich Securities said in an email to CNBC.

Mike Segar | Reuters

Proposals from IPAB could affect biotechnology companies, hospitals and insurers, with some restrictions.

"This is probably one of maybe five or six things health care investors were concerned about. ... My sense is a fairly low probability IPAB gets enacted and is a cost-cutting device," said Mike Bailey, director of research and chair at FBB Capital Partners.

"In my mind there are other concerns investors should focus on first," he said, referring to potential cost cuts by pharmacy management and insurance companies.

After the Medicare news, the iShares Nasdaq Biotechnology ETF (IBB) reversed earlier losses, to hold more than 1 percent higher. Celgene, Regeneron, Gilead were among the biggest positive influences on biotech index on Wednesday. The IBB fell more than 2 percent Tuesday amid concerns of a trigger to creating IPAB.

Analysts at Jefferies say IPAB is still a concern for the sector, and that much more will be needed to maintain the rally. "It will, though, be important to keep IPAB on the radar for 2017, and with reimbursement/election remaining overhangs for the group, we believe increased M&A activity, positive major clinical data, and/or substantial revenue beats would be needed to fuel a more sustainable rally."

Concerns over pricing pressure have contributed to declines for biotech stocks, with the IBB still down about 24 percent this year.

— CNBC's Evelyn Cheng contributed to this report